Economic slowdowns are not new to the Indian economy. Indeed, the rate at which the economy grew through the decade of the 1960s and the 1970s, famously described as the “Hindu rate of growth”, would in hindsight seem like a recession in perpetuity. So, if anything, it is familiar territory for everyone; the policymaker, the analysts and even academicians.
Nor are economic crises. In the 1950s, the Indian economy faced its first big challenge in the form of a foreign exchange crisis. In the 1960s, it was an agrarian issue that dominated. In the 1970s, the manufacturing sector went through a prolonged stagnation. In the 1980s the economy was confronted with a fiscal crisis and in the 1990s, there was a balance of payments problem. But this time it is different. This is the first time we are staring in the face of a full macroeconomic crisis encompassing all aspects.
All earlier downturns have been sector-specific or segmental. Even as many of these were intense, the impact and influence they had on the economy was limited. This could have been because of the sectoral disarticulation within the Indian economy and/or its relative insulation from the rest of the world. This could also have been the result of a counter cyclical public expenditure/autonomous investment policy of the government. Resultantly, past downturns haven’t had disruptive socio-economic consequences.
This time around, it is for the first time that all sectors and segments of the economy are getting entangled at the same time. The real-side slowdown began with the Index of Industrial Production (IIP) touching the low 1.9% mark (year-on–year) in September. The IIP will most likely to turn negative in October due to power, coal and iron ore supply issues.
The performance of the segments closer to the production end—capital goods is dismal at -6.8%. The growth of eight core industries for September stood at just 2.3% on an annual basis. Given that output of the capital goods sector is investment, these numbers reflect a serious lack of investment demand. Nearer to the consumer, overall domestic automobile sales have declined by 1.05% in October 2011; cement sales growth has been negative at 1.4% for October 2011. This reflects the drop in consumption demand.
The services sector that was providing the momentum to output growth has been slowing over the years and now the services Purchase Managers Index (PMI) has been below 50 for two consecutive months—September and October. A less than 50 reading indicates contraction.
If the real side looks bad, the nominal side has fared even worse. Inflation is now the single biggest concern. The persistence of Wholesale Price Index inflation at the near two-digit level has been made worse in its impact by its structure that is biased towards raw materials and food; the former impinging on profitability of companies and the latter affecting domestic consumption. With the Consumer Price Index at much higher levels, it has distributional consequences as well.
The monetary aggregates are all over the place with the cost of borrowing now looking to cross return on capital employed in many industries. Sooner than later, the economy will be faced with a situation in which debt servicing expenditure for private companies will far outweigh new capital expenditure. In other words, more money will be spent to defray past capacity creation than creation of new capacity: a clear indicator of a serious macroeconomic crisis.
Credit growth to the commercial sector has slowed down. Though the aggregate figure is still 17%—down from the 22% level—private corporate credit growth will occur at less than 10% on an incremental basis.
Unlike in the past, where an internal crisis never really spilled over to the external side, this time around, the domestic weakness are getting properly mirrored on to the external side; be it exports, currency or balance of trade or foreign investment.
Add to this the familiar fiscal crisis. The fiscal deficit is way out of line and the combined fiscal deficit of the Centre and the states may well cross the 1990 level. That the government finances are a mess is hardly surprising considering that the government has managed to raise just Rs 1,145 crore through divestments of public sector units as compared with a target of Rs 40,000 crore for FY12. Under-recoveries for the oil marketing companies have touched a staggering Rs 65,000 crore in the first half of the fiscal.
When these short-term transient issues are seen in conjunction with the long-term structural resources deficit that India has, a protracted macroeconomic crisis begins to take shape. It is this that needs to be addressed through policy action rather than the simple deviations from the trend.
Haseeb A. Drabu is an economist, and writes on monetary and macroeconomic matters from the perspective of policy and practice. Comments are welcome at firstname.lastname@example.org
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